Every businessperson periodically faces the need to verify the reliability of counterparties, especially when considering entering into a contract or conducting a business transaction with a company for the first time. Unfortunately, cases are not uncommon where a seller offers goods at an attractive price under prepayment terms but, after receiving the money, fails to fulfill their obligations. When the affected buyer then files a lawsuit, they may obtain a court decision ordering the dishonest seller to refund the money, but in practice, the recovery may be impossible. It often turns out that the fraudulent counterparty has no assets apart from massive debts from other legal disputes, and the prepayment was merely a scheme to obtain funds from an unsuspecting buyer—a recurring pattern for such entities. As a result, the money paid in advance is lost permanently. However, this unpleasant situation could have been avoided if the buyer had checked the reliability of the potential counterparty beforehand. Such a check could reveal, for example, the presence of debt recovery lawsuits against the counterparty, allowing the buyer to refuse to sign the contract or at least renegotiate payment terms to pay after receiving the goods.
Moreover, when entering into a transaction, the counterparty must have the necessary legal capacity to act on behalf of the entity they represent. There are frequent cases where contracts on behalf of large industrial enterprises or retail chains are signed not by the general manager—who, as a rule, can sign agreements without a power of attorney—but by a commercial director, sales department head, or another company officer. In such cases, contracts typically state that these individuals act under a power of attorney. Unfortunately, the other party does not always verify a copy of this power of attorney to ensure its validity and duration. Even top executives, such as directors or board chairpersons, do not always have unrestricted authority to sign agreements. It is common for company charters to include provisions requiring prior written approval for transactions exceeding a certain amount, for example, by the supervisory board in a joint-stock company or the general meeting in a limited liability company. This creates a risk that a contract may be signed by an unauthorized person, making it legally invalid.
Additionally, in tax relations, there is now a doctrine of proper tax diligence, which requires taxpayers entering into contracts to make reasonable efforts to verify the tax compliance of their counterparties. Conducting such checks impacts the proper execution of contracts, profitability, and eligibility for certain tax benefits, such as VAT credit formation. If a company cannot prove the actual execution of a business transaction, tax authorities may disregard primary documents as legally insignificant for tax benefit purposes. This means that even if documents are formally correct, they may be deemed unreliable and legally defective. Consequently, if a company signs a supply contract with a counterparty that does not file tax reports and has only one registered employee—the director—there is an almost certain risk that tax authorities will classify the transaction as fictitious and issue a tax notice-decision revoking the company’s VAT credit from the purchase.
Judicial practice, including rulings by the Supreme Court, establishes that taxpayers must exercise due diligence when selecting counterparties and entering into agreements. Failure to take appropriate measures may result in negative tax consequences. Therefore, verifying counterparties before signing a contract is advisable not only from a commercial perspective but also for tax compliance.
Thus, at the outset of relations with a new partner, it is crucial to exercise proper commercial and tax diligence by checking their records in available databases or using a legal service for counterparty verification. Leveraging our extensive experience in protecting clients’ interests, we have developed a proven set of actions to ensure a solid evidentiary base for demonstrating proper tax diligence.
The services of AO WinnerLex for counterparty verification include:
- Comprehensive verification of information regarding a legal entity or an individual entrepreneur;
- Verification of information about company officers and beneficiaries;
- Checking for ownership of corporate rights in other enterprises;
- Verification of trademarks and licenses;
- Legal analysis of data available in public registers;
- Analysis of court cases involving the counterparty;
- Obtaining information on the counterparty’s tax debt, and more.
Practice experience: 19 years
Specialization: litigation support, tax, customs and antitrust practices, agricultural law, IT and M&A
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Practice experience: 11 years Specialization: tax, customs and corporate disputes, support of inspections, contractual activities
Practice experience: 6 years
Specialisation: business and civil law, tax and customs practice, corporate law, registration and reorganisation of business
Practice experience: 11 years Specialization: support of economic, civil, labor and administrative disputes, inspections
Before Verifying a Counterparty, Request the Following Documents and Information:
- Charter (Articles of Association);
- Documents confirming the authority of the signatory acting on behalf of the counterparty (power of attorney, protocol on the appointment of the director);
- Company identification code number and actual address.
These documents and information will be sufficient to check the company on official government websites for signs of a shell company, its registration at a “mass” business registration address, and to verify whether a specific individual has the authority to sign contracts on behalf of the counterparty.
You can verify whether a company is registered with the tax authorities and whether it has any outstanding tax debt at the time of the check on the website of the State Tax Service of Ukraine.
You can verify information about the status of a legal entity or individual entrepreneur—whether it is active, inactive, or in the process of closure—as well as key data on state registration and organizational-legal form in the Unified State Register of Legal Entities, Individual Entrepreneurs, and Public Formations.
Verifying information about the amount of authorized capital and the date of a company’s registration is crucial, as it is advisable to choose companies with significant authorized capital and a presence in the market for at least a few years. Collaborating with a company that has an authorized capital of 1,000.00 UAH and was established only a few months before the contract date reasonably raises concerns about the success of the transaction.
In the Unified Register of Debtors of the Ministry of Justice of Ukraine, using the identification code of the legal entity, it is possible to determine whether the legal entity is a debtor in an enforcement proceeding.
On the Tax Service website and through specialized programs, you can collect and analyze documentary and other information about your business partner. These actions will help determine how diligently your partner fulfills their tax obligations.
Information regarding the initiation of a bankruptcy procedure can be found on the currently active website of the Higher Commercial Court of Ukraine.
In the event of a dispute with the tax authorities regarding a VAT tax credit, this will help confirm that your company exercised proper due diligence when selecting the counterparty.
